Congress and the Foreclosure Crisis

Currently, 20,000 people are losing their homes every week due to foreclosure. At that rate, 100,000 more homeowners will lose their homes before Congress passes a bill to stem the foreclosure flood. Sadly, the proposals currently making the rounds in both chambers will do little to stop the foreclosure crisis.

In order for a worthy relief package to be drawn up, most of the provisions in the bill passed last week in the Senate will have to be scrapped completely.

The bill would cost $21 billion over the next 10 years. $15 billion of that would be going to tax cuts that would have no significant impact on the average homeowner facing foreclosure. One set of tax cuts would let businesses take temporarily larger write-offs for losses. Another set would subsidize renewable energy. A $7,000 tax credit for buyers of foreclosed properties could backfire by allowing banks to charge more for repossessed property that would encourage more foreclosures. Another measure allows non-itemizers deduct property taxes, which is a shady tax policy and does not help the more needy homeowners facing foreclosure.

Also, the House Ways and Means Committee produced an item in the bill that provides tax breaks for first time homebuyers. Buyers should not be encouraged to jump in to properties when further declines in housing price are imminent. The resources available should be focused on preventing foreclosure.

The bill does, however, have some helpful items. Among them is money for local governments to buy foreclosed properties, money for foreclosure prevention counseling, and money for issuing tax-exempt bonds to help refinance sub-prime mortgages. While these are all helpful propositions, more must be done.

Democrats are pushing for a bill that would provide for the FHA to guarantee the restructuring of mortgages for at-risk borrowers. One major advantage of the plan is that due to the nature of the foreclosure crisis, the troublesome loans could be modified in great quantities.

But that plan does have some problems as well. For instance, the average American taxpayers would be responsible if the FHA borrowers defaulted. Congress cannot ask the taxpayers to carry the burden when Congress has not done all that they can to stop the crisis in other ways. One solution may be to give bankruptcy courts the power to modify mortgages.

The Senate had that provision in its most recent bill but eventually dropped it. Bankruptcy legislation has not been able to get out of the House either. Democratic leaders see it as their duty to bridge the gap and bring this type of legislation to the forefront. Both the Senate and the House must make a stand to the mortgage industry that may try to block any help for the crisis that they started.

The plan for the FHA rescue program would rely on lenders to reduce the loan amounts to an acceptable level for FHA to take over. Sadly lenders are not willing to do that. If lawmakers would increase the power of third party loss mitigation services to modify loans, it would make lenders more likely to reduce loan amounts on their own.

Congress has some of the right plans in place, but they need to stand up to the mortgage industry that helped create the current foreclosure crisis.

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